Pairs Trading - MF Global Futures broker, Futures trading, CFD trading, online Futures trading

Pairs Trading

Market Neutral (Pairs Trading) Explained

To illustrate a Pairs Trade in practice, lets examine what would have happened in if you had been bullish of Suncorp Metway (SUN) and bearish of St. George Bank (SGB). The trade was initiated at a ratio of 1.87 and taken off at a ratio of 1.75 (20.52/11.75 = 1.75).

As we are selling the higher priced share (SGB) and buying the lower priced share (SUN), this is referred to as “selling the ratio” i.e. to profit from this particular example we want to close out the trade when the ratio is lower than the opening value of 1.87.

Example Pairs Trade

		LONG - SUN		SHORT - SGB	RATIO
Open Position 28/06/03
Prices		$11.53		$21.55	1.87
Consideration		$20,004.55		$19,998.40
Margin (security deposit)	10%	$2,000.46	10%	$1,999.84
Commission	0.25%	$50.01	0.25%	$50.00
Initial Outlay		$2,050.47		$2,049.84

Close Position 17/09/03
Quantity		1,735		928
Price		$11.75		$20.52	1.75
Consideration		$20,386.25		$19,042.56
Commission	0.25%	$50.97	0.25%	$47.61
Financing (base rate +/- 3%)*		DR$344.05		CR $77.67

Profit/Loss		-$63.33		$935.90

Total Profit on Trade				$872.57

*Assumes base rate of 4.75% for duration of trade

In order to track the profitability of this Pairs Trade, one could either manually calculate the ratio by simply dividing the higher priced share by the lower priced share, or more easily by following it graphically.

Disclaimer: This website contains general information only and does not constitute financial product advice. Derivative products can be risky and are not suitable for all investors. MF Global Australia recommends customers seek independent advice. A MF Global Australia Product Disclosure Statement (PDS) is available through the website www.mfglobal.com.au and should be considered prior to trading MF Global's derivative products. Investing in derivatives carries a high level of risk to capital, and due to the potential volatility and fluctuations in value, investors may not get back the amount of their original investment. In certain circumstances an investor may be liable to pay a far greater sum, with losses being higher than an initial deposit.